Procter & Gamble Move Reflects Squeeze on Suppliers

Household products giant Procter & Gamble (P&G) has said it will increase the time it takes to pay for supplies and offering financing to help mitigate the impact that a longer payment cycle could have on small and medium-sized enterprises (SMEs).

According to a
Wall Street Journal
report P&G plans to increase the time it takes to pay suppliers by as much as 30 days, which could free up to US$2bn in cash. The paper, citing people familiar with the matter, reported that the world’s largest household products company aims to pay its bills in 75 days against the average of 45 days it takes currently.

A letter dated 5 April on the group’s website for suppliers announced that P&G’s “working capital programme will focus on moving to longer payables with our external business partners.” The letter appeared under the name of its chief purchasing officer, Richard Hughes, who said that P&G discovered that its payment cycle was out of line with those of its competitors. He added that the group planned to offer supply chain financing (SCF) via banks.

P&G recently began negotiations with its suppliers about the new payments terms, which are expected to be implemented over the next three years and could affect hundreds of companies, said the
WSJ
report. To assist P&G’s suppliers in dealing with the changes, P&G is working with banks to offer cash to suppliers after 15 days from delivery for a fee.

“External business partners will have the opportunity to leverage P&G’s strong credit rating and receive faster payment via SCF,” a statement by the group confirmed.

According to P&G’s supplier website, its payment terms policy is “net 75 days globally, where legally allowed,” for all new suppliers as of 1 March. Its largest existing suppliers are set to start to work under the 75 day policy in July, as new or modified agreements are reached and the revised policy will be applied to other existing suppliers starting in April 2014, on a rolling basis.

P&G’s move follows similar policies instigated by other multinational corporations (MNCs), which are becoming more aggressive in their cash management and imposing less favourable payment terms on suppliers.

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